Good bubbles

Date posted: May 31, 2011

Investment bubbles like the ones in technology and residential real estate can burst and lead to a recession. But some economists think there are good aspects to investment bubbles. N.C. State University economist Mike Walden explains.

“Well, the idea that some bubbles are good is based on the notion that bubbles generate a lot of investment. They generate a lot of innovation. And they generate a lot of new ideas that last very long after the bubble.

“I think the tech bubble would be a good example: Yes, the technology sector did grow too fast.  Yes, there was a crash. But when everyone was gung ho on technology, there (were) a lot of smart people in that industry. A lot of ideas that bubbled up — no pun intended — and really lasted a long time.

“So, I think that’s the basis of the notion that there are some investment bubbles that are good.

“On the other hand, some look at the residential housing bubble that clearly we had 5 to 10 years ago. That bubble burst. It really put us into the current recession. Obviously that was based on building and people buying a lot of homes — home prices going up very rapidly. And economists say, well, you can’t really say that that was a good bubble, because when there weren’t a lot of innovations or good ideas coming out of there, the bottom line is we simply overinvested in homes.

“So, I think this is a good point that there can be a good investment bubbles and bad investment bubbles.  Of course, the trick is to spot them in advance.”

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